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Economic logic may tell us that a country with a higher interest rate, thus a...

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Finance

Economic logic may tell us that a country with a higher interest rate, thus a higher rate of return, should be able to attract foreign capital and that a country with a lower interest rate, thus a lower rate of return, should experience an outflow of capital. If a country is experiencing a large net capital inflow its currency is likely to appreciate, while a country experiencing a large net capital outflow would likely see its currency depreciate (assuming a floating exchange rate). However, according to interest rate parity conditions a country with a higher interest rate would see its currency depreciate, while the currency of the lower interest rate country would appreciate. What is the main reason the outcome under interest rate parity conditions?

Question 21 options:

The relative interest rate level is not a factor for investment decisions

Investors do not seek higher return

Higher interest rates are a deterrent for investors while lower interest rates are favorable

The assumption that countries have an identical real interest rate

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